March 19, 2020: Los Angeles, CA
Coronavirus talk has engulfed our society. Most of us are holed up at home, with our daily patterns of life completely changed (for who knows how long). With everything now different, what happens to our contracts and agreements we entered into before anyone had even heard of the Coronavirus? If they are causing us financial distress or are no longer providing us any benefit, is there a way out, or are we stuck with them? What are the options for a business struggling in these strange times?
Many in the cannabis industry, and from all other types of businesses, now have extreme economic hardship due to the Coronavirus. Recent reports suggest that cannabis sales may be increasing (along with guns and alcohol sales) as people are hunkered down in their homes, stressed and preparing for the worst. Many license holders, and those attempting to secure a license, however, are in bad economic shape, with governmental delays, increased expenses, employees with childcare needs, travel difficulties, a lack of investors, and a slowdown in all activity. Cannabis businesses are in an especially precarious position, as most of them are just getting off the ground, with large startup expenses and debt.
Many types of contracts contain a “force majeure” clause (French for “superior force”), which apply in situations commonly known as an “act of God.” This type of contract term allows a party to suspend or terminate the performance of its obligations when unexpected circumstances beyond its control arise, making performance impossible, impractical, or inadvisable. Parties often include a list of force majeure events that could lead to the suspension or termination of a contract, including such events as earthquakes, fires, floods, hurricanes, wars, riots, strikes, or government actions that prohibit or impede parties from performing their contractual obligations.
The Coronavirus may be just the type of unplanned event that triggers these force majeure clauses, allowing parties to back out of their earlier agreements and obligations. We will soon see whether, and to what extent, the Coronavirus falls under these types of provisions, as there is little precedent for whether global pandemics are considered an act of God. Many organizers of concerts, sports, and cannabis events have had to pull the plug on their planned events to avoid risks of spreading Coronavirus, and to comply with government orders prohibiting large gatherings. A force majeure clause could allow the organizer to cancel the event in these circumstances, and address what happens to any money paid by ticket buyers, or by the organizer to third parties, in anticipation of the event. The concept could also be applied to any contract that calls for payments over time, including leases, investment agreements, and commercial and employment contracts.
Even if your contract that is causing you problems does not have a specific force majeure clause, you may still have a way out of the contract. Contract law has traditionally included the doctrines of “impracticability” and “frustration of purpose,” which allow parties to back out of earlier deals in certain unexpected circumstances.
Governments at all levels are also taking steps to help people experiencing financial distress due to the Coronavirus. President Trump has declared a national emergency, granting various new powers to the President to provide relief. The federal Small Business Association provides loans to small businesses suffering economic hardship due to the Coronavirus.
Los Angeles County has enacted a temporary moratorium on residential and commercial evictions due to nonpayment of rent in unincorporated areas. The City of LA is also working on an emergency ordinance to prevent residential and commercial evictions and late fees, to require landlords and residential mortgage-holders to work out payment plans with tenants, to extend expiring leases, and to waive various taxes and fees imposed on businesses.
Cannabis businesses could also get new forms of help from state and local licensing authorities. Companies could be given time extensions to complete licensing requirements, reduction or elimination of certain taxes and fees, and relief from onerous regulations that are expensive to comply with.
Lawyers can help you to review your current contracts and business circumstances, and determine what steps you could take to place yourself on firmer economic footing. There are many options for help, including terms in your contracts, legal doctrines, and various government relief programs. As we move forward through these uncertain times, businesses should assess all their options take advantage of the available opportunities.
Author: Raza Lawrence of Margolin & Lawrence.
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